Are you better off?

American life has grown fantastically richer since this magazine began. So why do you feel so much less secure?

By Pat Regnier, senior editor

(Money Magazine) -- There are a lot of ways to answer the question posed in our headline. You could look at how much the economy has grown over the past 35 years. Or at what people are telling pollsters about their satisfaction with life.

Here's an even more illuminating approach: Let's go shopping.

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Specifically, let's go to Costco. It's hard to imagine such a nirvana of consumption existing when Money Magazine began publishing in 1972. (Costco Wholesale was founded in 1983.) Indeed, you can think of a Costco warehouse store as a kind of cinder-block monument to the sweeping economic change that has occurred since the age of Nixon's wage and price controls.

Start with the dizzying plenty on those high-rack steel shelves. You may have come to save on toilet paper and a few other necessities. But when you push your double-wide cart through those oversize sliding doors, the first thing you see is a half-dozen high-definition televisions perched just right to compel you to gaze upward. Every time you visit, it seems, the screens are bigger, flatter and cheaper.

In this story: The upside....the downside...coping with new challenges

Plunge deeper in and you'll find $20 designer-label shirts, $11 crates of South African clementines and, for just $7.50, 28-packs of bottled water. If you can forget the fact that you used to be quite happy to get water from the tap, you are much better off as a consumer.

As you make your way through the store, it may or may not occur to you that there's another side to these great bargains. The less it costs you at checkout, the less somebody else must be getting paid to make it or sell it, right? Here, Costco customers can feel a bit virtuous. The company is famous for paying good wages ($17.50 an hour on average), and it offers decent health insurance too.

But here it's the exception that proves the rule. Wall Street analysts hector Costco to slash wages to the low standard set by Wal-Mart. In the wider tug-of-war between shareholders and wage earners, workers - except those in the executive suite - are losing ground.

Moreover, in every other way Costco is a model of the unsentimental efficiency that 21st-century capitalism demands. Costco's buyers are out scouring the global marketplace for the best deals, whether those goods are made by a middle-class union man in Ohio with a traditional pension (last one out, please turn off the lights) or by low-paid workers in Guangdong province.

From shipping to the bare concrete sales floor, the business is so lean that Costco can hire far fewer workers than Wal-Mart or Target to generate the same amount of sales. That makes it a potentially fatal competitor. Whether you sell groceries, wine, surfboards or even coffins, a Costco rising at the nearest highway exit is indeed a fearsome sight.

If you own a piece of Costco's business, on the other hand, it's a beautiful thing. Costco went public in 1985 - after the economy shook off the hyperinflation of the '70s and the crushing recession of the early '80s - as the great bull market in stocks really got rolling. A $10,000 investment then would be worth $360,000 today, and that's not counting dividends. (The S&P 500's not-too-shabby return would have gotten you to $72,000.) Costco shares now trade hands for 24 times earnings, a sign that investors think checkout lines will be snaking down the aisles for years to come.

So in one sense, the answer to the question "Are you better off?" is clear. Most families are materially richer. And the big economic shocks that made the 1970s so scary seem to have disappeared.

Amid this plenitude and choice, you have more opportunity than ever to become who you want to be. Got an entrepreneurial itch? Drive to Costco and you can plug right into its taut supply chain, whether you're starting a graphic-design firm or opening an eatery. "Plenty of restaurants are buying their apple pies from us," says chief financial officer Richard Galanti.

On the other hand, it sure seems harder to plan for the future when your job or even your career could move to some other (cheaper) part of your industry's smooth-running global network.

Saving for college or retirement has become much tougher too. The one choice you don't seem to have anymore is getting comfortable with a routine - and for grown-ups with a family life, a mortgage or a passion for a certain kind of work, that's a deeper loss than many New Economy boosters would care to admit.

This is the irony: Even as the risk in the overall system has declined - and perhaps because it's declined - you and your family face the prospect of greater financial turbulence. It's a set of challenges that your mom and dad wouldn't have dreamed of back in 1972.

Welcome to the Great Moderation

From an economist's point of view, we live in strange times. So strange they now have a snappy label: the Great Moderation. In the 13 years from 1970 to 1983, the U.S. went through four recessions. In the 24 years since, we've had two. The latest, which came around the time of 9/11, turned out to be quite mild. Interest rates, unemployment and inflation have all trended sharply down.

What happened? There's still a robust debate about this, and dumb luck/random event remains a leading theory. It also helped that the Federal Reserve got better at the chess game of managing inflation.

But the most obvious change is that the world became flat, to paraphrase Thomas Friedman. (His book is just $9 at Costco, by the way.) In the '80s and '90s, the Iron Curtain fell and market economics took hold in Eastern Europe and Asia. At home, the government deregulated banking and transportation. And all over the place, money and goods started moving faster and farther than ever before.

It's now a simple matter to move a dollar (or euro or yen) from someone who has one to someone who wants one. So if a part of the country is slumping and another is strong, explains Gerald Carlino of the Federal Reserve Bank of Philadelphia, a bank in the boomtown can easily lend money in the weaker region, helping businesses there recover faster. Families too seem better able to use widely available, relatively cheap credit to smooth out short-term disruptions like job losses, says Douglas Elmendorf of the Brookings Institution.

At the same time, containerized shipping, trade deals and the Internet have transformed business. Former labor secretary Robert Reich, author of the new book "Supercapitalism," boils the Great Moderation down to this formula: "Businesses have been able to reduce their fixed costs and rely more on variable costs." Instead of running a costly factory or call center, in other words, just contract it out. Switch when you find a better deal.

With this new flexibility, companies have gotten very good at adjusting to minute shifts in demand. Big suppliers of Costco can go online to monitor how their products are selling, and Costco can move merchandise in and out of its distribution centers and off to the stores in a matter of hours.

"It used to be that you'd keep producing even though demand had fallen, and then suddenly you'd have way too much inventory," says Paul McCulley, the Fed watcher at bond manager Pimco. Since this doesn't happen as often now, the business cycle should be less volatile.

The Upside: Creativity, Credit and Stuff

The label Great Moderation makes all of this sound like a big yawn. Life in these times, though, has been anything but.

For starters, work can be more fulfilling: Falling fixed costs and open access to capital have unleashed waves of creativity. Bloggers using free software can go toe to toe with newspapers relying on printing plants and delivery trucks. A couple of Stanford students can quickly turn a nifty search engine into a business worth more than General Motors.

And this culture of change reaches far beyond the flashy tech world, says Carl Schramm of the Kauffman Foundation, a nonprofit that studies entrepreneurship. Just flip to the back pages of an in-flight magazine. "Companies are advertising injection molding there," says Schramm. "They're talking to a passenger on a discount airline who may have an idea for a better baby high chair."

The Great Moderation also coincided with what Harvard economist Claudia Goldin calls the Quiet Revolution in women's employment. It's not that more women go to work - that change was well under way in the '60s. It's that more women expect to have careers.

Today about half of law and medical students are women, compared with around 10% in 1970. By itself the Quiet Revolution represents a huge advance in terms of freedom and overall well-being. It has also gone a long way toward pulling up standards of living. According to labor economist Stephen Rose, about 24% of adults in their prime working years live in households earning at least $100,000 a year. That's up from 12% (adjusted for inflation) in 1979.

With more money - and more credit - has come more stuff. Those two-professional families that marketers have christened the "mass affluent" can hardly find enough room to store it all; the average new house has 40% more closet space than in 1978.

But perhaps the biggest change isn't in quantity but in quality. "Products that we'd feel lost and forlorn without today couldn't be had at any price in the 1980s," says Brink Lindsey of the Cato Institute.

Consider that in 1980 a good entry-level compact stereo with a tape deck and turn-table cost a little less than $800 in today's dollars. Now that could buy you a wicked-fast home computer with good speakers and instant access, via the Internet, to millions of recordings (and it'll do e-mail and spreadsheets too).

All this new choice, argues Lindsey, has helped transform our culture into a 24/7 carnival of self-realization. Unlike the vast majority of humans in history, middle-class Americans can take for granted adequate food and shelter, not to mention countless little luxuries from your morning mocha to the car you drive all by yourself to work.

You have time to contemplate the meaning of life, and it's never been easier to explore the possibilities, whether through Internet social networks, books, music or new kinds of food. (Ask an older vegetarian what his life was like before Whole Foods.)

You can wallow in Paris Hilton gossip but also get to know the museums of Paris. And if your passions are just a little off-center, a lot of entrepreneurial companies today, nobody cares about the nose ring as long as you bring good ideas to the meeting.

It's not such a stretch to say that the Great Moderation is one reason your teenage son or grandson is a goth one week and a prep the next. It may also be why American politics so often seems to divide along cultural lines: Rick Warren-reading NASCAR dads vs. NPR-listening Volvo drivers.

The Downside: Big-Picture Anxiety

So is all this abundance making us happier? Apparently not. There's a whole academic subdiscipline devoted to figuring out why Americans don't report being any more satisfied with life than they were in the 1940s. (The good news is that we've been reasonably happy all along.)

But maybe it's not so surprising. This is hardly the first time Americans have enjoyed life-changing technological advances, notes Jared Bernstein of the Economic Policy Institute.

Think of radios bringing entertainment into every home, or washing machines freeing up women's time for leisure or paid work. Or the car opening up suburbia, and with it the chance for ordinary people to own a house and yard.

And in some important respects, the past few decades have been unusually tough on those who aspire to improve their lot. Union membership has declined to just 8% of the private-sector work force, from 27% in 1972. While women's wages have climbed, the median pay for men has stagnated.

Plenty of professionals feel that they're struggling to keep up too. In the postwar heyday of the corporation, economic progress looked like a big march: Almost everyone moved forward, with families from the top of the scale to the bottom roughly doubling their income from 1947 to 1973. Today progress is a race: The median household income grew by only 13% in real terms from 1979 to 2005, while those at the 95th percentile took home 42% more.

And despite shallower economic swings, says Congressional Budget Office director Peter Orszag, your risk of taking a big hit to your income is just as high as it was in the early '80s.

After all, the other side of entrepreneurial energy is intense competition. You are one of those variable costs your company might decide to cut one fine morning. (And, Princeton economist Henry Farber has found, as of 2003 you were likely to make 14% less at the next job - even if you went to college.)

Although flexibility has made the economy more stable, Reich notes, it also allows upstarts to force wrenching changes on established businesses; IBM no longer makes PCs. Kohlberg Kravis Roberts, the private equity group that invests in companies to "re-engineer" them, has stakes in firms employing more people than General Electric.

Flux may be fun for the young and adventurous. It can get old after 30. "Children are not variable costs," quips Reich.

And the fact is, most people still get fulfillment from mastering a job over time. In other words, even office workers value craftsmanship, says Richard Sennett, a London School of Economics sociologist who studies the culture of work. Doing it right is your mark on the world, even if you'll never be CEO. But it's tough to feel connected to work if you have one of those Chandler Bing jobs ("statistical analysis and data reconfiguration") that you can't explain to your kids and aren't certain will exist in three years.

"When a company is changing and needs a new set of skills, one of its first impulses is to go out and hire new skills," says Sennett. "The age at which people feel they are over the hill is sinking." And that, he adds, undermines one of America's most cherished beliefs: that hard work moves you toward long-term goals.

Those goals have themselves become more elusive. As Elizabeth Warren and Amelia Warren Tyagi observed in their 2003 book "The Two-Income Trap," a lot of really important stuff has gotten more expensive.

Take college. Prior to the 1970s, a degree may have seemed optional. Now it's key to whether you keep up in the earnings race, says Harvard's Goldin. But the cost of college relative to family income has shot up in recent decades.

Or look at the zooming cost of health care. True, what we're paying has brought real improvements: Life expectancy for heart attack victims, for example, increased by a year from 1984 to 1998, according to a Health Affairs study.

But that doesn't make rising premiums less stressful - especially if you're paying them yourself or you're worried about your job (and benefits) disappearing. You can be happy living without digital cable TV or a wine fridge for a while, but you won't cheerfully forgo a lifesaving drug just because, hey, it didn't exist in the '70s.

One obvious way to deal with these rising costs is to splurge less often on flat screens and the like. Easier said than done. "Now has emotional power, and delay does not," says economist David Laibson of Harvard. He's part of a research team that found evidence in MRI scans that the brain processes short-term and long-term rewards differently.

To compensate for this bias, societies develop "commitment devices," says economic historian Avner Offer, a professor at the University of Oxford. Marriage, for example, curbs promiscuity. But in an affluent world, we can't invent commitment devices fast enough to keep up with the flow of new temptations.

"We end up in a state of heightened arousal and neglect long-term priorities," says Offer. So as prepared food has grown cheaper relative to income (a dozen croissants are just $5 at Costco's bakery), waistlines have widened.

Savings present a similar problem. Retirement, like college and health care, is getting more expensive, if only because life is longer. But with all this cool stuff to buy, how do you resist the urge to spend every nickel now?

Here the problem isn't so much that commitment devices don't exist but that they're weakening. The traditional pension, says Offer, was a powerful tool: It saved on your behalf and generally didn't give you any way to touch that money until you retired.

But as companies attack fixed costs, those plans are being replaced by 401(k)s, which not only are voluntary but offer lots of ways to cash out.

The home mortgage is another commitment device, says Laibson. Through the simple act of paying off the loan over time you build equity that can turn into a nest egg. The financial innovations of the Great Moderation, however, make it easy to turn that equity into pocket money.

Coping with challenges of our new world

The Great Moderation is a description of the past. No one knows whether it describes the future. If luck was a factor, then it's worth remembering that luck can turn bad. Terrorism, an environmental calamity, an energy shock - any of these could bring volatility roaring back.

Or the Great Moderation could be its own undoing. McCulley of Pimco points to what's known as Minsky's financial-instability hypothesis, which posits that stability begets instability. People take bigger risks when they feel safe.

Prime example: subprime mortgages. First, Wall Street got comfortable charging low interest rates to borrowers. Investors who wanted more return had to buy up loans made to people who had less than rosy credit histories. Now that subprime borrowers are defaulting, investors are taking huge losses, and a credit crunch could trigger a recession.

Even if the Great Moderation keeps puttering along, though, the future presents some obvious - and a few not-so-obvious - challenges for you and your family.

Here are three essential coping strategies:

Invest (wisely) in your "human capital." Translation: Getting a college education and a white-collar job is no longer enough. Alan Blinder, a former vice chairman of the Fed and a confirmed advocate of free trade, has been warning that up to 40 million American jobs could potentially move offshore. That's 40 times the number of service-sector jobs that have so far gone abroad.

New jobs will be created, but many of the lost ones, Blinder predicts, will be in once "safe" industries like education and accounting, as communication technology makes it easier for companies to buy brainpower abroad.

That means that even if you have a good job, you'll have to find ways to stand out by tackling new kinds of projects, taking graduate courses or just networking outside your company and even your industry.

But there's a subtler lesson in this: If a degree no longer buys you lifetime security, you'll want to be careful what you pay for it. Take a lesson from corporate America and be wary of assuming high fixed costs - namely, huge student loans.

A loan for an undergraduate degree still makes sense, especially if you can keep the amount down by choosing a high-quality public university. And even a $100,000 debt is a reasonable trade-off for a medical degree. But $100,000 in the hole for a third-tier M.B.A.? Think hard about that one.

Don't count on easy money. Since the early 1980s, stocks have returned around 13% a year before inflation, way above the long-term gain of 10%. Part of the reason may be that as investors began to believe the world wasn't so scary a place, they became more willing to pay up.

But as McCulley likes to say, that was the journey. Now we're at the destination. We can't count on that pop again. (The same logic applies to real estate.) Many forecasters think even 10% is optimistic. You should save enough that you can make do if returns tail off from here.

The Great Moderation presents another challenge. Low interest rates are terrific when you're the borrower. But a retiree living off bond or annuity income is essentially a lender.

"When people have your money, you want the highest rate you can get," says Alicia Munnell, director of the Center for Retirement Research. Today's rates aren't bad, but they're nothing like the abnormally high rates of recent decades. That makes saving even more urgent.

Commit yourself. As long as the economy stays strong, it will keep challenging your self-control. Money Magazine doesn't do diet advice. But we know a few tricks to help you resist the urge to spend when you know you should save.

First, max out those 401(k) contributions, so you save the money before you even see it.

Harvard's Laibson also suggests forcing yourself to build home equity by choosing a fixed-rate mortgage with as short a term as you can comfortably stand.

Consider carrying a debit card, not a credit card.

If you do all that and still find yourself in trouble, well, much as it will pain you, perhaps it's time to let that Costco membership lapse.

Asa Fitch and Joe Light contributed to this article. Top of page

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.